A money market fund (also called money market funds) is an open-ended mutual fund investing in short-term debt securities such as US Treasury bills and commercial paper. Broad money funds (though not necessarily accurate) are considered as safe as bank deposits but deliver higher yields. Regulated in the United States under the Investment Company Act of 1940, money market funds are an important provider of liquidity for financial intermediaries.
Video Money market fund
Description
Money market funds seek to limit exposure to losses due to credit, market, and liquidity risks. The money market funds in the United States are governed by the Securities and Exchange Commission (SEC) under the Investment Company Act of 1940. Rule 2a-7 of the law limits the quality, maturity and diversity of investments by money market funds. Under this law, money funds primarily buy the highest rated debt, which matures under 13 months. The portfolio must maintain a weighted (WAM) weighted average of 60 days or less and not invest more than 5% in a single issuer, except for government securities and repurchase agreements.
Unlike most other financial instruments, money market funds seek to maintain a stable value of $ 1 per share. Funds are able to pay dividends to investors.
Securities in which the money market can invest include commercial paper, repurchase agreements, short-term bonds and other money funds. Money market securities must be highly liquid and of the highest quality.
Maps Money market fund
History
In 1971, Bruce R. Bent and Henry B. R. Brown established the first money market fund. It's called a Reserve Fund and is offered to investors interested in preserving their cash and getting a small payback rate. Some additional funds are immediately established and the market grows significantly over the next few years. Money market funds are credited with popularizing mutual funds in general, which until then, are not widely used.
Money market funds in the United States created a solution to the limitations of Rule Q, which at the time prohibited current accounts from paying interest and limiting interest on other types of bank accounts at 5.25%. Thus, money market funds are created in lieu of bank accounts.
In the 1990s, bank interest rates in Japan were close to zero for a long period of time. To look for higher yields from these low rates in bank deposits, investors use money market funds for short-term deposits instead. However, some money market funds fell short of their stable value in 2001 due to the bankruptcy of Enron, where some of the Japanese funds have been invested, and investors fled into the government-guaranteed bank account. Since then, the total value of the money market has remained low.
Money market funds in Europe always have a much lower level of investment capital than in the United States or Japan. Regulations in the EU always encourage investors to use banks rather than money market funds for short-term deposits.
Solve money
Money market funds seek a stable net asset value, or NAV per share (which is generally $ 1.00 in the United States); they aim to never lose money. $ 1.00 is administered through dividend declarations to shareholders, usually daily, at an amount equal to the net proceeds of the funds. If NAV funds fall below $ 1.00, it is said that the fund is "breaking the money." For SEC registered money funds, maintaining a flat $ 1.00 NAB is usually achieved under the provisions of Rule 2a-7 of the 40 Laws which allow funds to assess their investments at amortized cost rather than market value, provided certain conditions are maintained. One such condition involves the calculation of side tests of NAVs that use the market value of a fund investment. Funds issued, the amounts being amortized shall not exceed this market value of more than 1/2 cents per share, a comparison generally made every week. If the variation exceeds $ 0.005 per share, the fund may be deemed to have infringed the money, and the regulator may force it into liquidation.
Breaking money has been rare. Until the 2008 financial crisis, only three funds were damaged in the history of the 37-year money fund.
It is important to note that, while money market funds are usually managed in a fairly secure manner, there will be more failures during this period if companies that offer money market funds do not step up when needed to support their funds (by investing money to compensate for security losses) and avoid funds tear down money. This is done because the expected cost for the business from allowing the value of funds to customers and the lost reputation - is greater than the amount required to guarantee it.
The first money market fund to break the money was First Multifund for Daily Income (FMDI) in 1978, liquidating and presenting the NAV at 94 cents per share. The argument has been made that FMDI is not technically a money market fund as at the time of liquidation maturing securities in portfolios over two years. However, prospective investors are informed that FMDI will invest "only in the short term (30-90 days) of MARKET MONEY obligations." In addition, the rule limiting the maturity of which money market funds are allowed to be invested, Rule 2-a7 of the Investment Companies Act of 1940, was not announced until 1983. Before the adoption of this rule, mutual funds should do little other than present themselves as market funds money, which FMDI does. Looking for higher yields, FMDI has purchased securities with longer maturities, and raising interest rates negatively impacts the value of its portfolio. To meet the increased redemption, the fund was forced to sell a certificate of deposit with a 3% loss, sparking a statement of its NAV and the first example of a "money-breaking" money market fund.
The Community Bankers US Government Fund broke the money in 1994, paying 96 cents per share. This is only the second failure in the history of the money fund the last 23 years and no further failures for 14 years. The fund has invested most of its assets into adjustable interest rates. As interest rates rise, this floating rate loses value. This fund is an institutional money fund, not a retail money fund, so the individual is not directly affected.
No further failures occurred until September 2008, a month that saw the events of turmoil for money funds. However, as mentioned above, other failures are only blocked by the infusion of capital from the fund sponsors.
September 2008
Money market funds are becoming increasingly important for wholesale money markets leading to a crisis. Their purchases of asset-backed securities and large-scale financing of short-term debt of US foreign banks place funds in key positions in the market.
Sunday September 15, 2008, until September 19, 2008, was highly volatile for money funds and an important part of the confiscated financial markets.
Events
On Monday, September 15, 2008, Lehman Brothers Holdings Inc. filed for bankruptcy. On Tuesday, September 16, 2008, the Reserve Primary Fund broke the money when its shares fell to 97 cents after removing the debt issued by Lehman Brothers.
The continued deterioration of investors as a result of the bankruptcy of Lehman Brothers and other pending financial problems led to significant exchanges of money in general, as investors redeemed their holdings and funds were forced to liquidate assets or impose restrictions on redemption. Through Wednesday, September 17, 2008, major institutional funds see substantial redemptions. The retail fund saw net inflows of $ 4 billion, for net capital outflows of all funds of $ 169 billion to $ 3.4 trillion (5%).
In response, on Friday, September 19, 2008, the US Treasury announced an optional program to "insure ownership of publicly traded money market mutual fund funds - both retail and institutional - paying the cost to participate in the program". Insurance guarantees that if a closed fund has broken the money, it will be returned to $ 1 NAV. The program is similar to FDIC, in this case insuring ownership of deposits and trying to prevent running in the bank. This guarantee is supported by the Treasury Department Stabilization Fund's assets, up to a maximum of $ 50 billion. This program only covers assets invested in funds before September 19, 2008, and people who sell equity, for example, during subsequent market accidents and park their assets in cash funds, are at risk. The program immediately stabilized the system and liquefied outflows, but attracted criticism from banking organizations, including the Independent Community Bankers of America and the American Bankers Association, which expects funds to flow out of bank deposits and into newly insured money funds, because the latter will combine higher yields with insurance. The guarantee program expired on September 18, 2009, without loss and generated $ 1.2 billion in revenue from participation fees.
Analysis
The crisis, which eventually became the catalyst for the Emergency Economic Stabilization Act of 2008, nearly evolved into funding: the exchange led to a decrease in demand for commercial paper, preventing companies overthrowing their short-term debt, potentially causing an acute liquidity crisis: if firms can not issue debt new to pay the debt due, and have no cash to repay it, they will fail to fulfill their obligations, and may have to file for bankruptcy. So there are fears that the escape may lead to extensive bankruptcy, a spiral of debt deflation, and serious damage to the real economy, as in the Great Depression.
A decrease in demand results in a "buyer strike", because money can not (due to redemption) or not (for fear of redemption) buying commercial paper, pushing the yields up dramatically: from about 2% from the previous week to 8%, and the money saving they are in Treasuries, pushing their yield near 0%.
This is a bank that runs in the sense that there is a mismatch in maturity, and thus the money fund is a "virtual bank": a money-funding asset, while short-term, but usually has a maturity of several months, while an investor may request redemption at any time, without waiting for the obligation to mature. So if there is a sudden demand for redemption, assets can be liquidated in fire sales, lowering their selling price.
The previous crisis occurred in 2007-2008, where demand for commercially-backed asset paper declined, leading to the collapse of some structured investment vehicles. As a result of the event, the Reserve Fund was dissolved, shareholders paid 99.1 cents per share.
Statistics
The Investment Company Institute reports weekly money statistics as part of the mutual fund statistics, as part of industry statistics, including total assets and net flows, both for institutional and retail funds. It also provides an annual report in the ICI Fact Book.
By the end of 2011, there were 632 operating money market funds, with total assets of nearly US $ 2.7 trillion. Of this $ 2.7 trillion, retail money market funds have $ 940 billion in Assets Under Management (AUM). Institutional funds have $ 1.75 trillion managed.
The type and size of money funds
In the United States, its largest fund and trading organization, the Investment Company Institute, generally categorizes money into investment strategies: Prime, Treasury, or Tax-exempt and distribution/investor channels: Institutional or Retail.
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Funds that generally invest in debt with variable rates and commercial paper of companies and securities from US government and agencies. Can be regarded as any money fund that is not an excluded treasury or tax fund.
Government sponsorship and Treasury Fund
The government money fund (on the release of the July 24, 2014 regulation of the SEC) is one that invests at least 99.5% of its total assets in cash, government securities and/or "fully guaranteed" repurchase agreements (ie, secured by cash or government securities). The Treasury Fund is a type of government money fund invested in Treasury Bonds, Notes and US Treasury Notes.
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Investment funds primarily in state obligations and local jurisdiction ("municipal securities") are generally exempt from US Federal Income Tax (and to some extent state income tax).
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Institutional money is a high minimum investment, a low-cost class that is marketed to a company, government, or fiduciary. They often arrange for money to be swept by them overnight from the company's main operating account. Large national chains often have multiple accounts with banks across the country, but electronically withdraw most of the funds deposited to them to concentrated money market funds.
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Retail money funds are offered primarily to individuals. The retail money market funds hold about 33% of all money market fund assets.
The fund's yield is usually slightly higher than the bank savings account, but of course this is a different product with different risks (for example, an uninsured money account and not a deposit account). Since Retail funds generally have higher service requirements and therefore fees than Institutional funds, their results are generally lower than Institutional funds.
The SEC rules amendment released July 24, 2014 have 'fixed' the definition of retail money funds into one that has reasonably-designed policies and procedures to limit its shareholders to individual persons.
Fund money size
The total net assets of the US Fund industry are as follows: total net assets of $ 2.6 trillion: $ 1.4 trillion in base money, $ 907 billion in Treasury funds, $ 257 billion in tax-free form. The total Institutional assets are greater than Retail of about 2: 1.
The largest institutional money fund is JPMorgan Prime Money Market Fund, with assets of more than US $ 100 billion. Among the largest companies offering institutional money funds are BlackRock, Western Asset, Federated Investors, Bank of America, Dreyfus, AIM, and Evergreen (Wachovia).
The largest money market fund is the Vanguard Prime Money Market Fund (Nasdaq: VMMXX), with assets exceeding US $ 120 billion. The largest providers of retail money funds include: Fidelity, Vanguard (Nasdaq: VMMXX), and Schwab (Nasdaq: SWVXX).
Similar investment
Money market account
Banks in the United States offer savings and money markets savings accounts , but this should not be equated with money mutual funds . These bank accounts offer higher returns than traditional savings accounts, but often with higher minimum balance requirements and limited transactions. Money market accounts may refer to a money market mutual fund, a bank money market deposit account (MMDA) or a free credit balance sweeping the broker.
Ultrashort bond fund
The ultrashort bond fund is a mutual fund, similar to a money market fund, which, as the name implies, invests in bonds with very short maturities. However, unlike money market funds, there are no restrictions on the quality of the investment they hold. In contrast, ultrashort bond funds typically invest in risky securities to increase their profits. Because these high-risk securities can experience major changes in prices or even defaults, ultrashort bond funds, unlike money market funds, do not try to maintain a stable $ 1.00 NAV and may lose money or decline below $ 1.00 in the short run. Finally, as they invest in low quality securities, ultrashort bond funds are more vulnerable to adverse market conditions such as those brought about by the 2007-2010 financial crisis.
Upgraded cash
Enhanced cash is a bond fund similar to a money market fund, as they aim to provide major liquidity and conservation, but which:
- Invest in a wider variety of assets, and do not comply with the restrictions of SEC 2a-7 Rules;
- Aim for higher results;
- Have less liquidity;
- Do not target strong for a stable NAV.
Enhanced cash will usually invest a portion of its portfolio in the same asset as money market funds, but others in riskier assets, produce higher, less liquid ones such as:
- Low-rated bonds;
- Longer maturity;
- Debt in foreign currency;
- asset-backed commercial paper (ABCP);
- Mortgage-backed securities (MBS);
- Structured investment vehicles (SIV).
In general, NAVs will remain close to $ 1, but are expected to fluctuate above and below, and will break the money more often. Different managers place different emphases on risk versus improved cash returns - some consider principal preservation as paramount, and thus take some risks, while others see this as more bond-like, and an opportunity to improve results without having to preserve the principal. This is usually only available to institutional investors, not retail investors.
The goal of improved cash is not to replace the money market, but to adjust within the continuum between cash and bonds - to provide higher yielding investments for more permanent cash. That is, in a person's asset allocation, a person has a continuum between cash and long-term investment:
- Cash - most liquid and least risky, but low yielding;
- Money market/cash equivalents;
- Enhanced cash;
- Long-term bonds and other long-term non-cash investments - at least illiquid and most risky, but highest yielding.
The improved cash funding was developed due to low spreads in traditional cash equivalents.
There are also funds that are billed as "money market funds", but not 2a-7 funds (not meeting regulatory requirements). In addition to the qualified 2a-7 securities, these funds are invested in Eurodollars and repo (mutual agreement agreements), which are equally liquid and stable for securities eligible 2a-7, but are not permitted under the rules.
System risk and regulatory reform
Deconstruction of September 2008 events surrounding money market funds, and fear, panic, contagion, bank runs, emergency needs for substantial external buffers, etc. Reveals that the US regulatory system that includes the extension of basic credit already has substantial. the weakness that is behind the date back at least two decades.
It has long been known that regulation around credit extension requires substantial level of integrity throughout the system. As far as regulation can help ensure that the level of basic integrity persists throughout the chain, from borrower to lender, and limits the extension of overall credit to a reasonable level, an episodic financial crisis can be avoided.
In the 1970s, money market funds began to disintermediate banks from their classical interposition between savers and borrowers. These funds provide more direct links, with less additional cost. The major banks are governed by the Federal Reserve Board and the Office of Currency Financial Supervisors. In particular, the Fed itself is owned by large banks, and controls the entire supply of money in the United States. OCC is placed within the Treasury, which in turn manages the issuance and maintenance of a multi-trillion dollar government debt. The overall debt is of course related to the ongoing federal government spending vs. actual tax revenue that is in progress. Undoubtedly, the private banking industry, bank regulations, national debt, and ongoing government spending politics are substantially intertwined. Interest rates arising on national debt are subject to interest rate arrangements by the Fed, and inflation (all other equals) allows fixed debt obligations today to be paid off cheaper to earn dollars. The third major bank regulator, designed to quickly remove the failed banks is the Federal Deposit Insurance Corporation, a bailout fund and a resolution authority that can eliminate failed banks, with minimal disruption to the banking industry itself. They also help ensure depositors continue to do business with the bank after such failure by insuring their deposits.
From the beginning, money market funds fell under the SEC's jurisdiction because they looked more like investment (most similar to traditional stocks and bonds). deposits and loans (cash and cash equivalents domain of bankers). Although money market funds are fairly close and are often counted as the cash equivalents, their main regulator, the SEC, has zero mandates to control the money supply, limits overall credit extension, reduces boom and bust cycles, etc. The SEC focus remains on adequate risk disclosure, and honesty and integrity in financial reporting and the trading market. After adequate disclosure, SEC adopts hands, let buyers be careful .
For many retail investors, money market funds are very similar to traditional bank deposit deposits. Nearly all major money market funds offer check writing, ACH transfers, funding wiring, debit and credit cards, complete monthly reports of all cash transactions, canceled check copies, etc. This makes it appear that cash is actually in an individual account. With the reported net asset value flat at $ 1.00, despite the market value variance of the underlying asset actually, the impression of rock solid stability is maintained. To help keep this impression, money market fund managers often do not pay legitimate expenses, or cut their management costs, ad hoc and informally, to maintain stability stability.
To illustrate the various mixing and blurring functions between classical banking and investment activity on money market funds, a simplified example will help. Imagine just a retail "depositor" at one end, and an S & P 500 borrows through the commercial paper market on the other hand. Depositors assume:
- Very short duration (60 days or less)
- Diversification is vast (hundreds, even thousands of positions)
- High-level investment.
After 10-20 years of stability, "depositors" here assume safety, and move all the cash into the money market, enjoy higher interest rates.
At the end of the loan, after 10-20 years, the S & P 500 company became very accustomed to obtaining funds through this highly volatile money market. Initially, maybe they just borrow in this market for seasonal cash needs, being a net borrower only say 90 days per year. They will borrow here because they experience their deepest cash needs during the operating cycle to temporarily finance short-term increases in inventory and accounts receivable. Alternatively, they move to this funding market from the bank's previous revolving credit line, which is guaranteed to be available to them when they need it, but must be cleared up to a zero balance of at least 60 days of the year. In such a situation, the company has enough equity and debt financing for all their regular capital needs. But they depend on these resources to be available to them, as needed, every day.
Over time, the money "depositors" of the money market feel more and more secure, and not really risky. Likewise, on the other end, the company sees attractive interest rates and a very easy ability to keep rolling short-term commercial paper. By using rollover, they then fund long-term and longer liabilities through the money market. This extends credit. It is also from time to time clear that long term loans are at one end financed by on-demand depositors on the other, with some substantial confusion about what's finally going on between.
After the crisis, two solutions have been proposed. One, repeatedly backed up in the long run by GAO and the other is to consolidate the US financial industry regulator. A step along this line is the establishment of the Financial Stability Supervisory Board to address past systemic risk problems, as illustrated by the money market money crisis above, falls neatly among the loopholes of independent financial regulators. Proposals for incorporating SEC and CFTC have also been created.
The second solution, which focuses more on direct money market funds, is to rearrange them to overcome common misconceptions, and to ensure that money market "depositors", enjoying larger interest rates, fully understand the true risks they are making. These risks include substantial interrelationships between and among money market participants, and other substantial systemic risk factors.
One solution is to report to the money market "depositors", the true value of floating net assets. This disclosure came under strong resistance from Fidelity Investments, The Vanguard Group, BlackRock, the US Chamber of Commerce, and others.
The SEC will usually be a regulator to address risks to investors taken by money market funds, but to date the SEC has been internally crippled politically. The SEC is controlled by five commissioners, no more than three of whom may be the same political party. They are also heavily tied to the current mutual fund industry, and are largely divorced from traditional banking industry regulations. As such, the SEC is not worried over the whole extension of credit, money supply or banking shadow under the umbrella of effective regulation of credit regulations.
As the SEC stalls, the Financial Stability Oversight Council announces its money market reform and threatens to move forward if the SEC does not link it with a self-acceptable solution at the right time. The SEC has stated emphatically that this is their "territory" and the FSOC must step down and let them handle it, a point of view held by four former SEC chiefs Roderick Hills, David Ruder, Richard Breeden, and Harvey Pitt, and two former commissioners Roel Campos and Paul S. Atkins.
Reform: SEC Rule Amendments released July 24, 2014
The Securities and Exchange Commission (SEC) issues final rules designed to address the vulnerability of money funds to heavy redemptions at times of stress, increase their ability to manage and reduce the potential for transmission from such exchanges, and increase their risk transparency, while conserving, as much as maybe, the benefits.
There are several main components:
Floating NAVA requires institutional non-governmental funds
The SEC removes the assessment exhortation that allows these funds (whose investors have historically made the heaviest redemption in times of stress) to maintain a stable NAB, that is, they must make sales and redemption transactions as market-based or "floating" NAVs, rounded to decimal places fourth (for example, $ 1.0000).
Cost and gate
The SEC gives money to the board of directors of the board of directors whether to impose a liquidity charge if the weekly liquidity level of funds falls below the required regulatory threshold, and/or suspends temporary redemption, that is, to "gate" the funds, under the same circumstances. These amendments will require all non-government money funds to impose a liquidity charge if the weekly liquidity level of such funds falls below the prescribed threshold, unless the funding board determines that enforcing such fees is not in the best interest of the fund.
More conditions
In addition, the SEC adopted amendments designed to make money market funds more resilient by increasing their portfolio diversification, improving their stress testing, and increasing transparency by requiring money market funds to report additional information to the SEC and to investors. In addition, stress testing will be required and the main focus will be on funding ability to keep the weekly liquid assets at least 10%. Finally, the amendment requires investment advisers for unregistered large liquidity funds, which can have many of the same economic features as money market funds, to provide additional information about the funds to the SEC.
See also
- Fund shares
- Bond funds
- Revenue funds
- Target date funds
- Money market
- Money supply
- Sweep Account
- Stable value fund
- Shadow banking system
References
External links
- iMoneyNet - Provider of money market fund information and analysis
- Data Cranes and Money Fund Intelligence - money market money market news, results, and index
- MoneyRates.com - News, results, and information about money funds
- TheStreet.com: Dear Dagen: Where Can I Park My Money for Nine Months?
- GoBankingRates.com - Current Rates, News and Money Market Information
- ICI Fact Book
- The Reserve Fund website
Source of the article : Wikipedia
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